The longest US stock market bull run in history is now over, with the coronavirus outbreak proving severe enough to end 11 years of almost unprecedented post-financial crisis gains.
The Dow Jones Industrial Average officially closed in bear market territory, defined as a drop of more than 20 per cent from the peak, on Wednesday. Barring a miracle turnround, the more important S&P 500 index of America’s biggest listed companies will do so as well on Thursday.
All told, more than $12.5tn has now been lopped off the value of global equities in less than a month. In all of 2008, when the financial system nearly collapsed, the global stock market lost about $18tn of market capitalisation, according to the FTSE All-World index.
Despite the recent slump, US equities are still trading at about 15 times their forecast earnings for the coming year, compared with an average of just below 16 over the past 10 years. Given that markets tend to overshoot on both the upside and downside, a steeper decline looks possible.
The most recent step lower stems from the World Health Organization’s announcement on Wednesday that it now deems the coronavirus outbreak to be a global pandemic. President Donald Trump’s poorly received televised address, when he declared a travel ban on all continental European visits, has also exacerbated the pressure that has been building in markets for more than two weeks.
The post-crisis bull market run has faced many hurdles, all of which were swiftly overcome. Between its low almost exactly 11 years ago — it reached a nadir of 666 points on March 6, 2009 — and its peak on February 19 2020, it handed investors a return of more than 500 per cent. That makes it the longest bull run in history, and put it within touching distance of being the strongest.
Europe’s debt crisis threatened to plunge the global economy back into recession in 2010-12, but eventually simmered down. In 2013 the end of the Federal Reserve’s bond-buying programme briefly caused a flare-up that threatened developed-world stocks, but investors eventually realised that interest rates would prop them up by staying low for a long time.
China’s economic slowdown also caused angst, most notably when authorities let the country’s currency depreciate in mid-2015 and the start of 2016. Markets went into a tailspin in February 2018, when several small volatility-tied funds imploded. The Fed’s gradual interest rate increases and rundown of its bond holdings then contributed to a bruising December, causing US stocks for the briefest of moments to dip into a bear market.
But each time, investors shrugged off the setbacks, kept calm and “bought the dip” — a phrase that became such a mantra that it even made it on to T-shirts, coffee mugs and a viral (by finance industry standards) YouTube video.
Today, almost no one is calm; the few investors that have cautiously tried to buy dips have suffered a pummeling for their efforts; and even some of Wall Street’s biggest bulls are warning that the sell-off will get much worse before it gets better.
“The new year started with such promise,” said David Kostin, Goldman Sachs’ chief US equity strategist wistfully on Wednesday. But given the twin blows from coronavirus and collapsing oil prices, corporate earnings are now in recession and the bull market is finished, he forecast.
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“Both the real economy and the financial economy are exhibiting acute signs of stress,” Mr Kostin said. He has slashed his three-month forecast for the S&P 500 to 2,450, which would constitute another 10 per cent drop from Wednesday’s closing level and a 28 per cent collapse from the February peak.
Goldman’s short-term target would put the S&P 500 back to the level of late 2018 and mid-2017, despite the likelihood that the effects of coronavirus, the oil shock and financial markets in turmoil will be far-reaching.
What does history indicate? Goldman has counted 27 bear markets since the 1800s in which the average decline has been 38 per cent. It has on average taken 60 months to return to the previous peak, or 90 months in real, inflation-adjusted terms.
The average “event-driven” bear market, a label that seems to fit the current situation, was a more modest 29 per cent drop, and has taken only 15 months on average to reclaim the previous peak. Central banks still have at least some ammunition left, and fiscal stimulus looks almost certain to come. That may mean that markets snap back and start a new bull run later this year, the bank suggests.
However, this economic cycle was already very long, and given how strong markets have been over the past decade it is very plausible that the slump deepens. This bear market is unlikely to find its nadir until the aftershocks of the recent financial earthquake are over, and the extent of the economic impact of coronavirus becomes clearer.